Investopedia: Comerica Gets Bigger, But "Better" Has To Wait

Comerica (NYSE:CMA) might be something of a microcosm and preview for regional banks this year. This Dallas-based bank not only reported better credit numbers for its fourth quarter, but stabilization in its loan activity and an acquisition of a smaller bank in a key target market. 

The Quarter That Was
Comerica's earnings were messy, but fairly typical for banks right now. Reported revenue did climb 5% and net interest income was stable, but core PTPP (pre-tax, pre-provision) earnings were down about 2% on a sequential basis. What's more, average earning assets were down 2% on a sequential basis. Consequently, while the company did report an impressive beat on the earnings line - reporting earnings of 53 cents versus a consensus estimate of 31 cents - virtually all of that upside was outside of its core earnings potential.

As that last sentence suggests, credit and provisioning was a major driver this quarter (as it is for virtually every U.S. bank right now). The company's fourth quarter provisions for loan losses were less than half of those in the third quarter and less than a quarter of what they were a year ago. As a result, the company's ratio of non-performing assets to total assets fell on a sequential basis. Said differently, the company charged off about $113 in bad loans this quarter, but only provisioned for $57 million of that, and that boosted the reported earnings (a "release" of loan loss reserves).

Getting Even Bigger in Texas
While Comerica's history is in Michigan, the company clearly sees Texas as its future. To that end, the company announced the acquisition of Sterling Bancshares (Nasdaq:SBIB). Comerica is offering up about 0.24 of its shares for each share of SBIB, giving the company a 29% premium (even after the stock had been moving up on merger chatter).


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BMO Buying Marshall & Ilsley

There was a widely held view that Bank of Montreal (NYSE:BMO) was going to expand its U.S. business, and the company did exactly this today - announcing that it was acquiring Wisconsin's Marshall & Ilsley (NYSE:MI) in an all-stock deal. Provided the deal closes as expected, this deal will make BMO the 15th-largest bank in the United States (it is already No.3 or No.4 in Canada, depending on the metric used to measure this), and the No.1 bank in Wisconsin (with 20% deposit share), as well as a leading bank in Arizona and several Midwestern states like Illinois.

The Terms of the Deal 

To acquire Marshall & Ilsley, BMO will exchange 0.1257 of its own shares for each share of MI - a deal that gives an implied value of $7.75 per share to MI. That's a 34% premium to where MI closed Thursday afternoon, although movement in BMO shares will change that imputed valuation and premium. All in all, it is a $4.1 billion deal for BMO, though the company will also be launching a nearly $800 capital raise as part of the deal and will be repaying MI's $1.7 billion TARP obligations.

A Weak Bank = No Premium 

Like the earlier deal between M&T Bank (NYSE:MTB) and Wilmington Trust, BMO is paying a fairly minimal premium to do this deal. In fact, BMO is taking out Marshall & Ilsley at a price that is roughly equal to its tangible book value. (For related reading, see Willmington Trust Sold For Tangible Book Value.)

So why is MI selling for so little? Well, BMO's comments about the deal suggest that MI was still in rough shape. In fact, BMO will be writing off about 12% of MI's loan book right off the top - a charge that will cost about $4.7 billion and means that cumulative losses for MI will be around 21% (if things get no worse from here). That is a pretty staggering amount of bad debt and a sharp indictment of management's decision to expand from the "boring" Midwest into hot real estate markets like Arizona and Florida. (For more, see Banking Merger Mania.)

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A Small Bank Deal With A Big Premium

The M&A scene for U.S. banks has been big on rumors (like Santander (NYSE:STD) and M&T Bank (NYSE:MTB)) and the acquisition of small, failed institutions, but there has been relatively little in terms of willing deals among two solvent parties. Old National Bancorp (NYSE:ONB) shook that up in a big way on Wednesday by buying Monroe Bancorp (Nasdaq:MROE) at a sizable premium. 

The Deal
At the time of the announcement, Old National was offering almost $84 million in stock to acquire Monroe Bancorp, a deal that works out to 1.275 shares of Old National for every share of Monroe. At the prices of each stock prior to the open of trading Wednesday, that represented an eye-popping 148% premium for Monroe shares. The deal does include a collar, though, such that if Old National's stock moves above $10.98, Monroe shareholders will get $14 of Old National shares.

Although the deal was designed with a target price of $13.35 in mind for Monroe shares, as of this writing the market has pushed Monroe's price up to only about $11.30. Do not let the "only" mislead, however; that still represents over 100% appreciation for the stock. At this price, the trailing price-to-book ratio is 1.27; a strong premium relative to larger Midwestern banks like Fifth Third (Nasdaq:FITB), TFS Financial (Nasdaq:TFSL) or Marshall & Ilsley (NYSE:MI). 


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A Quick Review Of Zions Earnings

Zions Bancorp (Nasdaq: ZION) produced a scary quarter for June. Not scary in so much as the results were poor (though they were not very good at all), but scary because there are so many different ways to look at them. Depending on what you see as "core" and what adjustments you think are necessary, you can get a very large range of outcomes. I am a sucker for clean statements and easy reporting, so that is not a positive in my book.

Revenue for the quarter was anything from up 1% sequentially to down 7% depending upon how you want to look at it. I will not go into all of the forensic accounting here (unless somebody asks me to), but I think the most accurate peg is "down mid-single digits". Within that, core net interest income fell about 2%.

Expenses were problematic for Zions, particularly those related to REO (that is, bank-owned foreclosed properties). The company did reported lower provisioning for bad debts (lower by almost $40M), but charge-offs were about 30M higher and the NPA (non-performing assets) is still a way-too-high 7%. All in all, net losses were about 12% higher than the first quarter, and the company is unsure if it will make a profit at all this year.

Continuing a theme, loan performance was weak - down about 2% sequentially, with a larger drop in commercial real estate lending. I like the fact that Zions confirmed something I had been thinking for a little while now - namely, that banks are competing more aggressively for high-quality loans. See, banks have been saying that loan demand is weak, but that does not sync with what business owners are saying. So, I happen to believe that Zions came closer to scratching the truth - demand is weak among good borrowers.

I happen to think that there is still a risk that Zions could need more capital, particularly if there is another soft patch in markets like California, Washington, and Texas. Still, for a bank that was seen as a sure-fire goner in the worst of the crisis, I think Zions deserves some credit for hanging in there.

Would I buy Zions shares? No thanks. Even if I estimate that the bank can return to 14% ROEs (and I think that is a *big* "if"), the stock is worth about $25. That is a lot of risk to take for a roughly one-third gain. Given that I think future ROEs will be more in the range of 12%, I am even less interested.

Regional banks are getting thumped right and left today; Zions, Marshall & Ilsley (NYSE: MI), Fifth Third (Nasdaq: FITB), Regions (NYSE: RF), and so on. If I were looking to buy a bank in Zion's neighborhood, I would be more inclined to go big (Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), US Bancorp (NYSE: USB)) or maybe even smaller (Umpqua (Nasdaq: UMPQ)).

Either way, I would leave Zions alone for now.